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Journal of Management Studies 49:8 December 2012

doi: 10.1111/j.1467-6486.2012.01079.x
COMMENTARY

The Mirage of Microfoundations

Geoffrey M. Hodgson
The Business School, University of Hertfordshire Business School

Keywords: aggregation problems, emergent properties, methodological individualism,

microfoundations

If the project to bring ‘microfoundations’ into strategic management and organizational

analysis (Abel et al., 2008; Felin and Foss, 2005, 2006, 2009) simply means that we ‘we
stress the need to build microfoundations rooted in individual action and interaction’
(Felin and Foss, 2009, p. 162), then we should applaud it.[1] But this simple and valid
proposition is complicated by added ambiguities.
Strangely, this current project: (a) ignores the failure in the 1970s of the project to build
macroeconomics on secure microfoundations; (b) retains damaging ambiguities; and (c)
is ultimately inconsistent in its own terms. I deal with these three issues in turn and focus
on the insufficiency and rhetorical bias in their core claims and propositions.

THE FAILURE OF THE MICROFOUNDATIONS

PROJECT IN ECONOMICS
Mainstream economics has attempted to place economics on individualistic microfoun-
dations. But this project faced insurmountable difficulties and essentially collapsed under
the weight of its own internal problems. This episode has lessons for the current proposal.
Starting from the assumption of individual utility maximization, Hugo Sonnenschein
(1972, 1973a, 1973b), Rolf Mantel (1974), and Gerard Debreu (1974) showed that the
excess demand functions can take almost any form; there is no basis for the assumption
that they are generally downward sloping. Furthermore, a general equilibrium may be
indeterminate and unstable unless very strong additional assumptions are made, such as
that society as a whole behaves as if it were a single individual. As Alan Kirman (1989)
has reiterated, the consequences for neoclassical general equilibrium theory are devas-
tating. As S. Abu Turab Rizvi (1994, p. 363) explains, the work of Sonnenschein, Mantel
and Debreu is quite general and is not restricted to counter-examples:
Address for reprints: Geoffrey M. Hodgson, University of Hertfordshire Business School, De Havilland
Campus, Hatfield, Hertfordshire AL10 9AB, UK (g.m.hodgson@herts.ac.uk).

© 2012 The Author

Journal of Management Studies © 2012 Blackwell Publishing Ltd and Society for the Advancement of Management
Studies. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street,
Malden, MA 02148, USA.
1390 G. M. Hodgson
Its chief implication . . . is that the hypothesis of individual rationality, and other
assumptions made at the micro level, gives no guidance to an analysis of macro-level
phenomena: the assumption of rationality or utility maximisation is not enough
to talk about social regularities. This is a significant conclusion and brings the
microfoundations project to an end.

A devastating consequence is the breakdown of the types of analysis based on indi-

vidualistic ontologies where relations or structures are downplayed (Ingrao and Israel,
1990; Kirman, 1989).
The microfoundations project in economics was based on the utility-maximizing
individual. The work of James Coleman (1990) – which Teppo Felin and Nicolai Foss
support enthusiastically – and of their co-author Peter Abell, also involves rational,
utility-maximizing agents. Even if we overlook criticism of utility-maximization, there
are further lessons from this former microfoundations episode in economics. While it
is important and valuable to consider individuals and their psychology, we cannot get
far by considering individuals alone. We have to consider relations between individuals
as well. All social analysis requires some consideration of social structures, as well as
individuals and their motivations.
Given this, much ‘microfoundations’ rhetoric is one-sided and misleading. While
social relations are always present (even if covert) in social science discourse, they are still
not given enough emphasis in economics. If they were there would be much more
dialogue with sociology.

FATEFUL AMBIGUITIES AND FURTHER PROBLEMS

Much of the rhetorical power of the work of Peter Abell, Teppo Felin, and Nicolai Foss
in favour of their ‘microfoundations’ project is based on statements such as the following:
(i) ‘Organizations are made up of individuals, and there is no organization without
individuals.’ (Felin and Foss, 2005, p. 441)
(ii) ‘Specifically, there are no conceivable causal mechanisms in the social world that
operate solely on the macro-level.’ (Abell et al., 2008, p. 491)
(iii) ‘We take the position – associated with “methodological individualism” – that the
explanation of firm-level (macro) phenomena in strategic management must
ultimately be grounded in explanatory mechanisms that involve individual action
and interaction.’ (Abell et al., 2008, p. 492)
(iv) ‘Combining methodological individualism with an emphasis on causal mecha-
nisms implies that strategic management should fundamentally be concerned
about how intentional human action and interaction causally produce strategic
phenomena.’ (Abell et al., 2008, p. 492)
Apart from the questionable definition of methodological individualism – about which
more below – I agree with all these statements. But despite their citation of some of the
key material in the philosophy of social science, these authors consistently ignore ambi-
guities and problems that have been raised in this literature. The following statements (by
me) are also true:

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 The Mirage of Microfoundations 1391
(v) There is no organization without social relations.
(vi) There are no conceivable causal mechanisms in the social world that operate
solely on the micro-level of the individual alone.
(vii) Explanations of firm-level (macro) phenomena must be grounded in explanatory
mechanisms that involve social relations, as well as individuals.
(viii) An emphasis on causal mechanisms implies that we should also be concerned
with how intentional human action and interaction are themselves caused.
Organizations are more than individuals: without social relations and social posi-
tions they would not be organizations. They would simply be aggregates of isolated
individuals. So statement (i) has to be supplemented by the observation (v) that
organizations involve social relations, and there is no organization without social
relations.
Statement (ii) is also valid but inadequate. Ignored is the equally valid proposition (vi)
that there are no conceivable causal mechanisms in the social world that operate solely at
the individual level. The individual too is made up of component parts with biological,
neurological, and psychological causes. The supra-individual and sub-individual levels
have also to be taken into account.
Statement (iii) defines ‘methodological individualism’ as if such a task were simple and
uncontroversial. But the historical and analytical literature on the term reveals that it is
deeply ambiguous and there is no consensus over its meaning (Hodgson, 2007; Udéhn,
2001). Among the several meanings used by its advocates are the following prominent
options:
(x) Social phenomena should be explained entirely in terms of individuals alone.
(y) Social phenomena should be explained in terms of individuals plus relations
between individuals.
Although the difference may appear slight, it has enormous consequences. Emphati-
cally (x) has never been achieved in practice: all viable explanations of social phenomena
so far encountered involve relations between individuals as well as individuals themselves
(Arrow, 1994; Nozick, 1977).
By contrast, the content of version (y) is acceptable, because of its inclusion of both
individuals and social relations in the explanantia. But consider what it means: social
relations as well as individuals are essential to explain social phenomena. Many social
theorists define structures as social relations. Accordingly (y) is equivalent to the idea that
social phenomena should be explained in terms of individuals plus social structures. Both
versions of (y) invoke dual explanantia. So its description as ‘methodological individualism’
is misleadingly biased towards one side of the story. It would be equally biased and
erroneous to describe (y) as ‘methodological structuralism’. Neither is the term ‘meth-
odological collectivism’ acceptable. The problem with (y) is of labels rather than content.
We always have to start from relations/structures and individuals. There is no other viable
explanatory strategy. Biasing the label in one direction or the other is highly misleading
(Hodgson, 2007).
Abell, Felin, and Foss do mention individual interactions, and these necessarily involve
social relations. So I assume they align with (y). But they seem unaware of the bias

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1392 G. M. Hodgson
involved in labelling this as methodological individualism. They should also follow one of
their mentors, Friedrich Hayek (1967, pp. 70–1), and mention such relations explicitly:

The overall order of actions in a group is . . . more than the totality of regularities
observable in the actions of the individuals and cannot be wholly reduced to them. . . .
[The] whole is more than the mere sum of its parts . . . these elements are related to
each other in a particular manner . . . [and] the existence of those relations which are
essential for the existence of the whole cannot be accounted for wholly by the inter-
action of the parts but only by their interaction with an outside world . . .

Like others (Kontopoulos, 1993; Weissman, 2000), Hayek was clear that relations
between individuals must be included in our social ontology. Unfortunately the afore-
mentioned advocates of ‘microfoundations’ are imprecise about the nature of the foun-
dations upon which we have to build. I ask them to clarify their position on (v)–(viii), (x)
and (y) above. Without such clarification we are invited into a swamp of ambiguity and
rhetorical bias. In particular, to be even-handed, it is important for them to acknowledge
the validity of statements (v)–(viii), as well as their valid emphasis on the individual.

LEVELS OF ANALYSIS
Statement (iv) emphasizes causal mechanisms and says we ‘should fundamentally be
concerned’ with ‘intentional human action and interaction’. But why is this individual
level ‘fundamental’? As scientists, aren’t we also obliged to examine the ‘nuts and bolts’
of individuals as well? Aren’t we also required to explain the causes behind individual
capacities and intentions, or do we regard these as somehow uncaused, or beyond the
reach of science?
So far the answer of our authors to the final question is unclear. In another paper,
Felin and Foss (2011) argue for ‘free will’, some causal ‘wiggle room’, or ‘indeterminacy’.
Hence do they regard intentions as (partially) uncaused, thus beyond the reach of (any
eventual) causal explanation? Are intentions entirely caused or not? Personally I follow
others in claiming that they are (Bunge, 1959; Hodgson, 2004; Veblen, 1919). Do Felin
and Foss by contrast believe in the uncaused cause? Does their rhetorical elevation of the
individual among explanantia result from a belief that human intentions are somehow
privileged in nature as causally undetermined? Again they are unclear.
Science is about causal explanation. And all science tries to explain wholes partially in
terms of their components. But complex wholes cannot be entirely explained in such
terms. If they could, then there would be no such thing as social science. We would all
have to be subatomic physicists, attempting to explain social and other phenomena
entirely in terms of the most elementary subatomic particles. Different sciences exist
precisely because this goal is beyond our reach: relations and interactions involve a
multiple-layered ontology with emergent properties (Humphreys, 1997) and processes
that take place through time (Winter, 2012).
To settle on the individual as the ‘fundamental’ unit of analysis is problematic. Why
stop at the level of the individual? Why not get down to the neural structures in the brain?
Or the biochemistry of the human organism? Or atomic physics?

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 The Mirage of Microfoundations 1393
The same arguments concerning explanatory reduction from the macro to the micro,
and from groups to individuals, apply equally to explanatory reduction from individual
to gene, gene to molecule, molecule to atom, and so on. If we can reduce explanations
to individuals, then why not further reduce them? To avoid this double standard one
must either accept multiple levels of analysis, or reduce everything to the lowest onto-
logical level – the realm of physics. If we admit multiple levels of analysis then there is no
reason to assume that the social realm has one level only. Organizations involve emer-
gent properties that render them additional units of analysis, while fully acknowledging
that their very existence depends on individuals – just as the existence of individuals
depends upon atoms.
Although Abell, Felin, and Foss point to some genuine limitations of the routines
literature, their proposed ‘microfoundations’ strategy is unclear and misdescribed. They
rightly stress the importance of understanding individual psychology and motivations,
but this point has already been stressed by many authors (including myself) and we do not
need biased ‘microfoundations’ rhetoric to establish this point.
Accordingly, when Linda Argote and Yuqing Ren (2012) identify ‘transactive memory
systems’ as part of the ‘microfoundations’, they do not claim that they exhaust the
explanantia. David Teece (2012) does not have to reduce explanations entirely to indi-
viduals to make the point that individual entrepreneurship can be vital. Michael Cohen
(2012) points to the crucial role of habit – much in line with my own work in this area
(Hodgson, 2004, 2008) – but does not claim that habit is the sole unit in terms of which
everything can be explained. ‘Microfoundations’, if it is a meaningful and operative term,
cannot mean complete micro-reduction.
Abell, Felin, and Foss underplay the role of relations or structures in explanation and
are unclear whether explanations can or should be in terms of individuals alone. Alter-
native accounts of routines do exist that are more in line with reputable philosophy of
science.

NOTE
[1] The author is very grateful to Markus Becker, Michael Cohen, Thorbjoern Knudsen, Dick Nelson,
Sidney Winter, and an anonymous referee for helpful comments on previous drafts.

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Journal of Management Studies © 2012 Blackwell Publishing Ltd and
Society for the Advancement of Management Studies